16.	Income Taxes

The total income tax expense of

$1.7

million recognized for the

three

months ended

January 31, 2020

was primarily related to state tax expense from the impact of the cancellation of debt income recorded for tax purposes but

not

for GAAP purposes, creating a permanent difference. The total income tax expense of

$0.3

million recognized for the

three

months ended

January 31, 2019

was primarily related to state tax expense from income generated that was

not

offset by tax benefits in states where we fully reserve the tax benefit from net operating losses.

Our federal NOLs of

$1.5

billion expire between

2028

and

2037,

and

$32.1

million have an indefinite carryforward period. Of our

$2.5

billion of state NOLs,

$211.4

million expire between

2020

through

2024;

$1.2

billion expire between

2025

through

2029;

$760.1

million expire between

2030

through

2034;

$277.6

million expire between

2035

through

2039;

and

$74.4

million have an indefinite carryforward period.

Deferred federal and state income tax assets (“DTAs”) primarily represent the deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing differences results in a loss, such losses can be carried forward to future years. In accordance with ASC

740,

we evaluate our DTAs quarterly to determine if valuation allowances are required. ASC

740

requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than

not”

standard.

As of

January 31, 2020

we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC

740.

Listed below, in order of the weighting of each factor, is the available positive and negative evidence that we considered in determining that it is more likely than

not

that all of our DTAs will

not

be realized. In analyzing these factors, overall the negative evidence, both objective and subjective, outweighed the positive evidence. Based on this analysis, we determined that the current valuation allowance for deferred taxes of

$596.0

million as of

January 31, 2020,

which fully reserves for our DTAs, is appropriate.

As of

January 31, 2020,

on a tax basis, the Company had pre-tax income when adjusted for permanent differences on a

three

-year cumulative basis. However, on a US GAAP basis, the Company was still in a

three

-year cumulative pre-tax loss position as of

January 31, 2020.

Therefore, it is too early to conclude whether we will continue to

not

be in a

three

-year cumulative loss position going forward on a tax accounting basis. Per ASC

740,

cumulative losses are

one

of the most objectively verifiable forms of negative evidence. (Negative Objective Evidence)

In the

third

quarter of fiscal

2017,

second

and

third

quarters of fiscal

2018,

fourth

quarter of fiscal

2019,

and

first

quarter of fiscal

2020,

we completed debt refinancing/restructuring transactions which, by extending our debt maturities, will enable us to allocate cash to invest in new communities and grow our community count to get back to sustained profitability. (Positive Objective Evidence)

Our net contracts per community and our absolute net contracts increased in the

first

quarter of fiscal

2020

compared to the

first

quarter of

2019,

which is the

third

consecutive quarter of year over year increases in contracts per community and absolute net contracts. (Positive Objective Evidence)

We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative Objective Evidence)

We exited

two

geographic markets in fiscal

2016

and completed the wind down of operations in

two

other markets in fiscal

2018

that have historically had losses. By exiting these underperforming markets, the Company has been able to redeploy capital to better performing markets, which over time should improve our profitability. (Positive Subjective Evidence)

The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to before the housing downturn of

2007

2009,

the uncertainty of the overall US economy and government policies and consumer confidence, all or any of which could continue to hamper a sustained, stronger recovery of the housing market. (Negative Subjective Evidence)